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Employment Law

Court of Appeal rules that State must pay damages in informal insolvency case

A recent Court of Appeal decision has found that the State has failed to adequately implement EU Legislation by failing to provide a procedure to protect employees’ entitlements in the event of an informal insolvency of their employer.

Introduction

Ms. Glegola was employed by Metro Spa Ltd. (the “Company”). She was dismissed from her position in 2011 having been informed that the Company was to be placed in liquidation. The reason given for her dismissal was redundancy. It then appeared that the Company continued to trade and Ms. Glegola proceeded with a claim to the Rights Commissioner under the Payment of Wages Acts, the Organisation of Working Time Act and the Unfair Dismissals Act. It was argued on her behalf that as the Company’s designation in the CRO was “normal” rather than “in liquidation”, it was in essence continuing to trade. The Company argued in correspondence; that it was clear from an inspection of the premises that the Company had ceased trading and, in the circumstances, a true redundancy situation did exist. However, the Company did not attend at the Rights Commissioner hearing and, as Ms. Glegola’s evidence was uncontested, an award was made in her favour under the Unfair Dismissals Acts, Organisation of Working Time Act and Payment of Wages Act in the sum of approximately €16,800.00. The Recommendation of the Rights Commissioner was not appealed and therefore became a debt due and owing by the Company to Ms. Glegola. Ms Glegola never received payment from the Company of the sums due to her and in October 2013 the Company was struck off the Register of Companies for failing to file accounts.

Relevant Law & The Social Insurance Fund

Article 2(1) of Directive 2008/94/EC on the protection of employees in the event of the insolvency of the employer states that;

“For the purposes of this Directive, an employer shall be deemed to be in a state of insolvency [emphasis added] where a request has been made for the opening of collective proceedings based on the insolvency of the employer, as provided for under the laws, regulations and administrative provisions of a Member State, and involving the partial or total divestment of the employer’s assets and the appointment of a liquidator or person performing a similar task, and the authority which is competent pursuant to the said provisions has:

either decided to open the proceedings; or

established that the employers undertaking or business has been definitively closed down and that the available assets are insufficient to warrant the opening of the proceedings”.

The Protection of Employees (Employers’ Insolvency) Act 1984 (the “1984 Act”), treats an employer as insolvent “if, but only if… a winding up order is made or a resolution for voluntary winding up is passed with respect to it, or a receiver or manager of its undertaking is duly appointed…”.

In short, to avail of the protections provided by the Social Insurance Fund an employee must show that the employer is insolvent as defined by the 1984 Act. Ms. Glegola’s case was that the 1984 Act did not go far enough as there was no term that mirrored Article 2(1)(b) of the Directive.

State of Insolvency

As Ms. Glegola did not receive the compensation due to her from her employer she sought payment from the Social Insurance Fund. As the Company had been struck off and no official liquidator was appointed, as required by the 1984 Act, Ms. Glegola’s legal representative attempted to use Section 251 of the Companies Act 1990, to establish the insolvency of the Company. Section 251 allowed the High Court to restore the Company to the Register of Companies and make a declaration that “the Company is unable to pay its debts and that the reason for it not being wound up is due to the insufficiency of its assets”. Ms. Glegola then made an application to the Department of Social Protection and contended that the Section 251 order was sufficient to trigger Article 2(1)(b). However, the High Court found that on the facts and on the procedures up to that moment in time Ms. Glegola had not satisfied the requirements of Article 2(1)(b) of the Directive.

Court of Appeal

Ms. Glegola pursued two grounds of appeal. Firstly, she requested the Court to grant an order that the declaration pursuant to Section 251 satisfied the requirements of Article 2(1)(b) of the Directive and that the State was obliged therefore to make payment to Ms. Glegola out of the Social Insurance Fund. It was argued, in the alternative, that if this was not the case that the State had failed to properly implement Article 2(1)(b). It was argued that the State had failed to put in place a procedure, as part of the statutory insolvency scheme, where an application could be made for an order declaring the employer insolvent as envisaged in Article 2(1)(b). In other words that the business was definitively closed down and that the assets were insufficient to warrant proceedings. It was also contended that Ms. Glegola was entitled to an award of damages against the State in the amount of the Rights Commissioner’s recommendation.

In relation to the first argument, Justice Finlay Geoghegan stated that the Section 251 Order did not satisfy the requirements of Article 2(1)(b), as a declaration had not been made that the Company had been definitively closed down. Nor, had a provisional or official liquidator been appointed to the Company. It was then necessary to consider Ms. Glegola’s second argument which was that the State had failed to adequately transpose the Directive. Article 1 applies the Directive to employers “who are in a state of insolvency within the meaning of Article 2(1)”. The 1984 Act provides that an employer which is a Company will be deemed to be insolvent “if, but only if” a winding up order is made or a resolution for voluntary winding up is passed or a receiver or manager is appointed. It does not permit a person to make a claim against the Social Insurance Fund in circumstances of a deemed state of insolvency consistent with Article 2(1)(b); being where it is established that the Company has been definitively closed down and that the available assets are insufficient to warrant the opening of proceedings.

For those reasons Justice Finlay Geoghegan concluded that the State had failed to correctly transpose Article 2(1) of the Directive, which mirrored what Justice Laffoy had, in a previous decision, referred to as the “unfairness inherent” in the 1984 Act.

Justice Finlay Geoghegan found that by failing to provide a procedure allowing an employee who was owed a debt by their former employer, a Company which is insolvent, to obtain an order as envisaged in Article 2(1)(b) it was sufficiently serious to warrant an award of damages against the State. Justice Finlay Geoghegan granted a Declaration that the State failed to correctly transpose the Directive and made an award of damages in the sum of €16,818.75, being equal to the award of the Rights Commissioner.

Conclusion

It is understood that the Department of Social Protection is currently considering the Judgment and consulting with its legal advisors on the implications of the Court of Appeal decision. In respect of redundancy payments, where the employer cannot afford to pay amounts due under the Redundancy Payments Acts 1967–2007 the employer and the employee can apply to the social insurance fund for a redundancy lump sum. The same formal requirements with regard to insolvency do not apply, and generally a letter from an accountant or solicitor confirming the employer’s inability to make the payment will be sufficient. Having a less formal requirement akin to the Redundancy Payments Acts above would seem to be a more practical and cost effective way to ensure that the Directive is implemented.

The Glegola decision also highlights the importance of looking past the relevant Irish legislation to the grounding European law to ensure that the aim and articles of a Directive have been fully transposed into Irish Law.